Case Study–Television Programming Startup Distorts the Industry

“When there are so many incumbents up in arms, pouring in endless resources to stop a little company like Aereo, you know you’re onto something good and you’re doing something right.” –Chet Kanojia, Aereo Founder & CEO

And such is the reality for startup digital television programming provider Aereo.  Created in 2012 to provide consumer Internet access to live broadcast television programming, Aereo has stirred up the broadcast television industry to the point of lawsuits. But as CEO Chet Kanojia pointed out in the above quote, the startup is fueled by the onslaught of controversy its existence has created. The company began with a sound financial foundation, soliciting more than $50 million dollars in investments from companies such as IAC/InterActiveCorp.  As recently as January of this year, the company released reports indicating that it has raised $34 million more in funding for expansion, solicited from investors like Himalaya Capital Management and Gordon Crawford, formerly of Capital Group Cos. That’s a good thing, considering the series of lawsuits that have resulted from the startup’s existence.  Apparently, the company knew what it was facing and launched with the strong financial and managerial outlook “it knew it would need to withstand an onslaught long enough to survive Big TV’s predictable attempt to kill it in the crib.” More about that later.

The basic engineering concept inherent to Aereo’s functionality tosses back to the very nature of broadcast television and utilizes similar technology.  Hearkening to the now-archaic “rabbit ears” and clumsy rooftop antennae required to channel broadcast television signals into the home, Aereo operates via antenna reception as well—albeit using antennae no bigger than a dime.  These tiny devices are located in a central warehouse, and subscribers pay a fee to access over-the-internet programming delivery by means of the antennae.

While Aereo’s concept pertaining to medium of delivery via the Internet doesn’t seem new [considering the long-standing availability of television programming by means of the internet through Internet Protocol Television (IPTV)], where Aereo has tapped into a startup market is in the area of the programming delivered. Internet access to television programming has been only in the ‘on-demand’ realm, through streaming providers like Hulu, Netflix, or HBO Go or wherein broadcast or cable networks provide access to their own original episodes on their proprietary websites. Aereo has now enabled reception of live programming on the Internet. The company is not creating its own content, merely grabbing the broadcast signals of the networks and transcribing them to customers via the Internet.  In this aspect, Aereo is not changing the way television is produced, but it is revolutionizing how it is delivered.

Not only can consumers use Aereo to access previously unavailable live programming online, but through the use of mobile devices it can be accessed anywhere—and in HD. This is new for the industry. Customers can even utilize Aereo’s DVR functionalities via mobile device, allowing them more options than home-based DVR systems have in the past.  The ability to access live programming by means of mobile devices as designed by Aereo is also pushing the television advertising industry into new realms, “enabling new ways to aggregate, measure and engage with audiences beyond the exclusive control of TV programmers.”

When Aereo came on the scene only a year-and-a-half ago, the company started small. Its initial rollout was in New York City alone. This spring, however, the company is expanding its service offerings to cities all over the nation including Chicago, Atlanta, Philadelphia, Houston, Boston and Detroit. Preliminary demographics for Aereo’s subscriber base indicate that most customers are under 30 and that many of them “had never had traditional subscription cable or satellite TV as adults. Instead, Aereo users largely rely on Internet-only and streaming services for content.”  Aereo’s advent works out well for this demographic, allowing this group access to live television entertainment to complement their on-demand online use—thus providing a television package much like what cable television offers but at much less expense A subscription to the Aereo service can range as low as $8/month.

In its favor, Aereo’s technological design is user-friendly, being largely “no setup required…plug and play.”  Sources say this is encouraging to consumers who want to use this type of Internet-based live streaming programming access but whom have been put off in the recent past by other, somewhat similar technologies which were more complicated and more difficult to install and navigate.  And the service’s DVR capability, while more limited than those offered by cable or satellite providers, offers as much as 40 hours of space.

The insight, convenience and cutting-edge services offered by Aereo are easy to discern.  The company provides both dissatisfied cable customers, as well as those who’ve never been cable customers and whose reliance on the internet for programming hasn’t afforded them the prerogative to enjoy live broadcast programming, a cheap and easy option.  On its mere characteristics, Aereo appears to have a brilliant and intuitive startup business model with the sky as the limit.

That was until the lawsuits started.  Currently, a series of television networks is pursuing litigation against the startup, claiming that its existence is violating content-sharing copyright laws and unfair business practice statutes.  Specifically, ABC, 21st Century Fox, NBCUniversal, CBS and others have filed a series of suits, claiming that the “transmission of content without a license is a copyright violation.” The broadcast networks are attempting to convince the courts to view what Aereo does as a “public performance” of their programming, which would be a direct copyright violation. Broadcasters are further concerned, as other companies such as DirecTV and Charter Communications have suggested they might enter this so-called over-the-air (OTA) antenna Internet service if Aereo is successful in defeating litigation.  Aereo has aggressively countered the allegations, saying that “because each antenna (used by Aereo to transmit signals to customers) is assigned to a specific customer, Aereo says that it’s not providing a public broadcast.”

Broadcast and cable outlets are fuming because the company’s mode of business allows it to evade paying retransmission fees for dissemination to customers. But so far two lower courts have ruled in Aereo’s favor.  This has prompted broadcasters to take the case to the Supreme Court. The Court agreed to hear the case in January of this year in order to determine if what Aereo is doing is actually legal. “We are very optimistic since we have won four in a row,” Kanojia said in an interview with Bloomberg.

Even with litigation at the Supreme Court pending, Aereo has at the very least presented the television broadcasting industry with an important disruption that may change the face of the business for good.  Millions of Americans are already ‘cutting the cord,’ leaving behind former means of attaining television programming to opt for Internet services.  Aereo meets this need head-on.  Already, ABC has responded to the startup by introducing its own ‘Watch ABC’ mobile app, which allows paying subscribers to access the network’s live programming via the Internet. And in an initial response to Aereo’s advent, broadcast network giant Fox even threatened to go off the air entirely and become a cable-accessed only network if the startup succeeded.

Regardless of specific realities caused at the hand of Aereo, it’s clear the startup television programming provider has made a mark on the industry.  The Supreme Court’s ruling could be the demise of the company, but the face of the industry has already changed, and Aereo’s impact will continue to be felt.

 

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